Tech upstarts threaten TV broadcast model

Children watch television in the living room in New York January 13, 2011. REUTERS/Lucas Jackson

(Reuters) - Two fledgling technologies could dramatically reshape the $60 billion-a-year television broadcast industry as they challenge the business model that has helped keep broadcasters on the lucrative end of the media spectrum.

On April 1, a U.S. appeals court rejected a petition by the major broadcasters including Comcast’s NBC, News Corp’s FOX, Disney’s ABC and CBS, to stop a service called Aereo, which offers a cut-rate TV subscription for consumers by capturing broadcast signals over thousands of antennas at one time.

It was the second time in recent months that TV broadcasters failed to block a new technology that undercuts revenue they generate for their television shows.

In November, a California court struck down Fox’s request to ban Dish Network’s ad-eliminating video recording device called the Hopper.

The two services strike at the heart of the TV broadcast model, whose future will be up for debate at the National Association of Broadcasters show, which 90,000 people were expected to attend in Las Vegas this week.

The most touted feature of the Hopper makes TV commercials disappear completely when watching recorded prime-time broadcast television, unlike prior DVRs and other devices that require the viewer to fast forward through ads.

Aereo could cut the numbers of people who need or want a more expensive cable video subscription, which would eat into the $3 billion in so-called “retransmission fees” that research firm SNL Kagan says broadcasters get from cable and satellite systems, based on the number of their subscribers.

The threat so far is limited. The number of people using Aereo - backed by media heavyweight Barry Diller, who launched the Fox network in 1986 - is miniscule compared to the number of pay TV customers in the United States. Dish’s Hopper is a more mainstream device that Dish’s 14 million subscribers have access to.

But broadcasters fear the services will continue to expand, cutting into their viewing audience and advertising revenue.

Even though courts have made preliminary decisions in favor of Dish and Aereo, both cases are still in the early stages and those decisions could ultimately be reversed.

FORCING CHANGE

A favorable outcome for Aereo and the Hopper in court would push TV operators to dramatically reshape themselves. It could even force them to trade in their broadcast towers and become cable channels alongside networks such as Bravo, AMC and ESPN, says Garth Ancier, who has been the top TV programmer at Fox, NBC and the WB networks.

Some of the top four major networks have been considering just such a move for months, and the emergence of the two technology threats could accelerate their decisions, according to Ancier.

That would keep the broadcasters’ signals away from Aereo and their ads free from the Hopper, which for now only zaps broadcast ads in recorded television.

The downside? Broadcasters would have to turn their backs on the 11.1 million homes that Nielsen estimates still receives their TV signals from rabbit ears and rooftop antennas and do not have cable subscriptions.

Spokesmen for Fox, CBS, NBC and ABC declined to comment on their plans. Last week, following the Aereo ruling, Fox said “the court has ruled that it is OK to steal copyrighted material and retransmit it without compensation.”

All the broadcasters also said they plan to keep fighting Aereo and said they were confident that the rights of content owners would be protected.

NEW VIEWING HABITS

Both the Hopper and Aereo take advantage of changes in how TV viewers get their shows. Increasing numbers are “binge watching,” or tuning into libraries of recorded episodes on their DVRs or on the Internet. As many as 5 million homes now “cut the cord” and get their TV shows from sources such as streaming on the Internet or watching DVDs or game consoles, according to a March 11 Nielsen study.

For now, the number of people using either the Hopper or Aereo is small but growing.

The Hopper is the free DVR for new Dish customers and is the focus of Dish’s current ad campaigns. Dish has 14 million customers, making it one of the biggest U.S. pay TV companies behind Comcast and DirecTV, the company says.

Aereo has never revealed its subscriber numbers but it is expanding quickly. In February, Aereo said it was available to 19 million people, mostly in the New York area, and it embarked on an outdoor advertising campaign. It plans to expand to 22 other cities this year including major markets such as Chicago and Houston.

Even before Aereo and the Hopper appeared, the percentage of viewers who watch TV from the traditional networks was crashing, down from 69 percent in 1993 to 42 percent today in February, according to Nielsen.

A further jolt to the broadcasters’ dwindling audience would empower advertisers, who last year spent $27 billion on broadcasting commercials, to negotiate tougher on price hikes and could take some of that money elsewhere.

Just as troubling for the broadcasters, if ratings continue to decline, the TV networks will have smaller captive audience to whom they can promote their new programming slate, which would likely accelerate the downward cycle.

“It’s like the music business,” said BTIG media analyst Rich Greenfield. “They decline and decline and one day the bottom falls out.”

The networks might fight back. CBS Chief Executive Leslie Moonves told an investor conference last fall that he may pull CBS off the Dish’s system, depriving the service’s subscribers of NFL football and “CSI” if the satellite operator continued to promote the Hopper’s commercial skipping feature.

On March 26, CBS said it acquired a 50 percent stake in the cable channel TVGN, formerly the TV Guide Network, adding a cable channel that would be safe from Aereo.

TVGN and its fellow cable channels are so far safe from the Hopper. Dish’s chairman Charlie Ergen said in February that Dish does not yet have the technology to zap commercials on cable and the company has not announced any intention to do so.

Broadcasters still hope to cut off both services by persuading the courts that they violate copyright laws and breach contracts.

For now, Aero and the Hopper will only get more popular as the cases wind their way through court, said intellectual property attorney Andrew Goldstein, a partner with the Chicago firm of Freeborn & Peters.

“It will be hard to put that genie back in the bottle,” Goldstein said.

Reporting By Liana B. Baker in New York and Ronald Grover in Los Angeles; Editing by Frances Kerry and Doina Chiacu